Bank bailouts – How does the UK compare?

Here’s an interesting table I came across the other day while I was looking for something else. Buried in the IMF’s recent report Fiscal Adjustment in an Uncertain World is a comparison of the size and impact of bank bailouts in selected countries.

Screen Shot 2013-07-15 at 11.22.08

It shows the addition to 2012 debt as a result of the initial bailout and how much has been recovered so far. I’ve stuck the figures on a graph with the best (or least bad) on the left and the worst on the right.

Financial Sector Support (Percentage of 2012 GDP)

Screen Shot 2013-07-15 at 11.29.52

Given the size of the UK’s banking sector, our bailout wasn’t as big, relative to our economy, as those of some other countries. Germany, Belgium and the Netherlands were hit by bank failures too and Germany is still sitting on larger potential liabilities than the UK. (If anyone is interested, the details of the UK’s bank bailouts are on the National Audit Office website.)

This also shows that the UK’s bank bailout wasn’t the main cause of the rapid increase in debt between 2007 and 2012. Some left-wing commentators claim that public debt, and therefore austerity, has been caused by massive bank bailouts. But considering that UK net debt rose by around 35 percent of GDP over this period, the 7 percent spent on the bank bailout, while significant, is nowhere near the whole story. Yes, the GDP collapse and rising debt were brought about by the banking collapse but they were not a direct result of the bailout.

But, while that charge may not stick in the UK, it certainly does in Ireland. If you want to know how Ireland went from having one of the lowest levels of debt in the OECD to one of the highest (See previous posts), look no further. The collapse of the unholy alliance between Ireland’s banks and property developers has blown a massive hole in the country’s finances. Ireland was a small country with some very big banks. When they fell, they took the rest of the country down with them. Ireland’s economy may be recovering but the damage done in 2008 will take a long time to clear.

The American government seems to have fared best of all. According to the IMF it has recovered most of its bailout costs. That said, the recent claim that the bank rescue will end up costing US taxpayers nothing may be a bit premature.

How long it will take to recover the outlay from Britain’s bank bailout is very difficult to say. At one point, some optimists were suggesting that the exchequer might even make a profit on the bank rescue but that looks less likely now.

Although it might have looked like a good idea at the time, taking shares in banks in return for the bailout has hitched the taxpayers’ fortunes firmly to the bankers’ wagon. To  have a hope of breaking even, or even cutting its losses, the government has to be able to sell the banks and, as things stand at the moment, it will probably make a loss when it does so.

Still, it could be worse. Compared to some other countries, our bank bailouts look quite modest.

Update: The NAO puts the cost of Britain’s bank bailout at £141bn, as at March 2013. That’s £115bn in cash and £26bn contingent liabilities. At current prices, the taxpayer is sitting on a potential loss of £34bn from the reduced value of RBS and Lloyds.

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7 Responses to Bank bailouts – How does the UK compare?

  1. Luis Enrique says:

    “Although it might have looked like a good idea at the time, taking shares in banks in return for the bailout has hitched the taxpayers’ fortunes firmly to the bankers’ wagon”

    I agree that making the govt bank shareholders screws with its incentives when it comes to questions like how bank-profits-unfriendly to make much needed new financial legislation, but on the other hand insolvent banks need to raise new equity, so I don’t know how much leeway there was over whether to take shares in the banks.

    it’s also not clear what to make of any direct losses on the bailouts. As you point out, most of the deterioration in the public finances was caused by the recession, lower tax revenues higher welfare payments etc. Suppose the bailouts end up with a direct cost of £5bn, it might be the case that the alternative, letting them fail, would have worsened the recession and added £5bn to the deficit via even lower tax revenues etc. So the true cost of the bailout would be zero.

    (I have no idea whether these illustrative figures are reasonable. I am not suggesting you don’t already know this).

    • Rick says:

      Thanks Luis, yes I wasn’t suggesting here that we should not have bailed out the banks. It is fashionable in some quarters to say we should have let them fail but after seeing what happened after Lehmans that would probably have been a disaster. In that context, a final cost of £5bn would be cheap at the price.

    • SA says:

      I suspect the loss to public finances from not bailing out the banks would have been far in excess of GBP5bn. That said, the true cost of the bailout would still be GBP 5bn, or in true numbers, more like GBP 34bn, right? So we should not lose sight of the fact that changes are necessary to prevent the financial or any other sector from imposing huge costs on the public.

      Thank you for the well written article.

  2. In addition to Luis’ point about counterfactual, I would add another point on relationship between bank bailout and deficit – that despite bailing out the banks, we haven’t yet fixed them, so that the underlying conditions that caused a bailout to be required still apply to some degree, hence the deficit is larger than bailout costs by several fold.

    Difficult if not impossible to quantify this to any meaningful degree [hey, never claimed I was an economist ;-)], but my point is that if bailout costs 7% GDP, the reason bailout was needed might cost another 10% or some such – meaning that if we don’t use bailout to fix that 10%, we’ll not get it back even if 7% bailout money is recovered… I am losing my own thread of thought here but I hope you get the picture!

    Btw, what on earth happened in Netherlands…?! They managed an impressive recovery – any particular reason why?


    • Rick says:

      Prateek, no probs, I understand what you mean. Not bailing out the banks could (and probably would) have been much worse.

      No idea what trick the Dutch pulled to claw back so much of their bailout so quickly. I”l ask around.

  3. noIMspartacus says:

    5 billion the cost of the bankster bailouts? LMFAO… WTF are you smoking?

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